Shanghai Composite, Nasdaq, USDCNH, USDCAD Talking Points:
- Risk appetite continues to champion particular outlets from Shanghai Composite to Nasdaq 100 to the EEM ETF with lift evaporating among many other measures
- Stimulus is gaining a new fundamental influence with China’s efforts while trade wars are also gaining greater traction owing to blowback from the West on China’s Hong Kong polices
- The global economic calendar will end out the week with limited high-level event risk, but Canadian employment will be a top release
Risk Appetite Further Concentrates into Questionable Archetypes
Speculative appetite continues to present an uneven backdrop. I loosely consider the S&P 500 an imperfect but estimable one-look measure of ‘risk appetite’. That is owing to its representation of the benchmark asset type in the world’s largest economy – with a considerable depth of derivatives preferred by traders ranging from the emini futures to the SPY ETF to the VIX volatility index. This index carved out a broader range than anything this past week has seen, but it was ultimately a close lower. Naturally, for those that are not ready to pay mind to the systemic fundamental issues building in the background, the response is to look for another baseline. For top listing, the Chinese indices like the Shanghai Composite continues to pace the few outperformers. The index has enjoyed its most remarkable 7-day rally since September 2009 through Thursday – a period where the world was emerging from the GFC. Where is this strength originating? A familiar source: stimulus in the form of Chinese government assurances.
Chart of China’s Shanghai Composite Index with 50 and 200-Day Moving Average (Daily Chart)
Chart Created on Tradingview Platform
In the developed world, another familiar star performer from the past few years has managed to earn record highs of its own: the Nasdaq 100. The tech sector of the US equity market has been hailed as a disruptor, a concentration of revenue and now being treated as if it has immunity from the Covid-19 economic scourge. That expectation is dubious at best, but sentiment can prove a powerful force in the markets. Next week’s Netflix earnings will start the dive into actual performance metrics for this vaunted group. Looking for a third place performer, the EEM emerging market ETF is still keeping an impressive pace which is unusual given the circumstances, but the category does do well when stimulus is at the foundation of growth.
Chart of the Nasdaq 100 with 200-Day Moving Average and Spot-Mov Avg Difference (Daily Chart)
Chart Created on Tradingview Platform
China Represents Both Stimulus and Trade Wars
If we are looking for systemic fundamental themes for the next big moves in the market, there are few more central measures than the Chinese Yuan (USDCNH). On the positive side, Chinese markets and its currency have swelled under the implicit support offered by the government. A high profile state-backed paper ran a story supporting investment in local markets and the populace responded. Though a dubious lift, China is generally quick to respond with fiscal stimulus; and this does offer unmistakable tail wind. Domestic support, however, must be weighed against international pressure. The Western democracies are boosting pressure collectively against China for its moves to quell the protests in Hong Kong. The Trump Administration announced another four Chinese officials were added to their sanctions list for the heavy-handed national security laws and other countries are threatening their own further measures. USDCNH is a key benchmark to watch on this front with 7.0000 still a pivot level. That said, AUDUSD has seen its correlation wane, but there is still strong economic connection and no outside intervention.
| Change in | Longs | Shorts | OI |
| Daily | 0% | 0% | 0% |
| Weekly | 30% | -22% | 16% |
Chart of USDCNH Overlaid with USDAUD in Red (Daily)
Chart Created on Tradingview Platform
Amid a Light Economic Calendar to Close the Week: Canadian Dollar Volatility Potential
From the systemic to the contained event risk, Friday’s docket is particularly light for high level releases. Though there are a few highlights that would register in my fundamental assessment of various areas of the global financial markets, I think the greatest potential for direct volatility would rest with the Canadian Dollar and the local employment report for June. This is a fairly consistent market mover historically when there is surprise. That is no guarantee of shake up for the data, but given the congestion in the Loonie crosses lately, conditions are well staged for a jolt.
Chart of Equally-Weighted Canadian Dollar Index with 200-Day Moving Average (Daily)
Chart Created on Tradingview Platform
Among the various CAD crosses, there are many interesting pairs to choose from including the AUDCAD and EURAUD. However, the pair I will be watching closest through this event risk is USDCAD. The burden of fundamental clarity for the US Dollar could cap its impact; but if this particular pair is driven to a clear and/or persistent move, the implications for the many crosses would be in turn remarkable.
| Change in | Longs | Shorts | OI |
| Daily | 0% | 1% | 1% |
| Weekly | -15% | 61% | 24% |
Chart of USDCAD with 50-Day and 200-Day Moving Averages (Monthly)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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